Iron ore spot prices have been on a tear in 2017, rallying more than 17% on top of a 80% gain in 2016. From the lows of mid-December 2015, the price for benchmark 62% fines has now jumped by 140%, according to Metal Bulletin.
It’s been massive, underpinned by restocking, strength in steel prices, weather-related disruptions, strong China imports and an overly optimistic view for demand from the Donald Trump’s infrastructure stimulus plans, among other factors.
However, it’s not going to last, says HSBC’s equities metals and mining team.
“We believe that these factors will eventually fade however due to the lack of fundamental support,” it says.
“While some of the more speculative noise will likely abate, the key fundamentals remain weak and we believe that relatively strong supply growth will ultimately drive prices lower as demand growth fails to absorb additional volumes.”
And it’s not going to be a small, steady pullback, HSBC says, suggesting that prices are “set for a massive fall this year”.
“The longer prices remain elevated, the greater the likelihood that marginal supply will be added to the market,” the bank says.
This chart from HSBC shows the estimated cost curve for seaborne iron ore producers this year.
And, given the elevated price right now, it thinks that a lot of supply is coming.
“While demand remains largely stable, supply will increase considerably from here into 2H17. Seasonally stronger supply — mainly from Australia, Brazil and China — is likely to result in 39 million tonnes (mt) of additional supply in 2Q17 compared to the current quarter and another 26mt in 2H17. Similarly, we see an additional 68mt of supply from majors and 20mt output from the restart of mines in India,” it says.
“This could add around 30mt of quarterly supply by 4Q17 and drive a 10mt quarter-on-quarter increase in Q2 alone. On an overall basis, this will increase the supply by 40mt in 2Q17 and therefore, shift the market balance from a 10mt deficit in 1Q17 to 30mt surplus in 2Q17.”
As such, HSBC says that in a static demand environment, any further supply response to elevated iron ore prices will have a “profound impact on prices”.
Supply will increase sharply as demand remains steady, shifting the global market from deficit to surplus. Anyone who has studied basic economics will know what generally happens next.
“We believe there is significant potential for a collapse in iron ore prices,” it says.
“We expect seasonally stronger iron ore output from 2Q combined with the wall of new supply coming this year, to be a significant driver of the expected price fall.”
HSBC says that its long term price forecast is for a return to $52 a tonne, some 44% below the current spot price of $92.36.
Still, even with a decline of such magnitude, that price would still be well above the break-even levels of Australia’s big three iron ore miners, Rio Tinto, BHP Billiton and Fortescue Metals.
This chart shows how HSBC expects the iron ore spot price to evolve over the course of 2017.